tv Bloomberg Real Yield Bloomberg September 21, 2018 7:30pm-8:00pm EDT
johnson: from new york city and our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: a slow most selloff in the global bond market driving treasury yields towards 2018 highs. investors driving back towards emerging markets, feeling a big -- fueling a big bid into corporate loans. funding this year's biggest leveraged buyout. we begin with the big issue, the quiet climb through 3%. >> our take is it's about time the 10-year started pricing with what the strong u.s. economy is doing.
>> we were expecting deals to -- we have been expecting 10 year yields to remain around 3%. they were a little lower another lowery were little bit for a couple of months, now they are back up just above. we think the levels will attract investors. >> look at the difference between the 10-year in the u.s. and in germany. it is 254 basis points today. there is a limit to how much you can stretch that without breaking something in the system. it can go wider. what happens when it does go wider? you will get dollar appreciation, more emerging-market pain. it absolutely can go wider. >> vol in the rate market is due to go up. the fed policy is beginning to just bite. just a little it is starting to leave a mark. >> it will reverse value stocks, tech stocks, and no interest rates. i think there might be more room to run. i think this kind of gives the fed cover. they had been adamant they will slowly increase rates over time. jonathan: joining me in new york
is jeffrey rosenberg, krishna memani and portfolio manager at oppenheimer funds noelle corum. let's begin with the quiet climb high in treasury yields. do you expect it to continue? noelle: you nailed it. is a quiet climb higher. we think it is due to a couple of reasons. the drivers aren't exactly clear. part of it is that tariffs not being as bad as people expected, maybe marginally. the trade war is not over by any means, but part of it is we have seen the idiosyncratic risk come off the table. turkey and russia are both hiking to alleviate concerns. argentina, the deal with the imf looks like it will be better than expected. it is not any one driver. is multiple.
krishna: at the end of the day it's about the u.s. economy doing much better than what everyone was expecting. that is the primary driver. noelle's point about other issues are important, but the primary driver is the u.s. economy. the question is, can this be sustained for a long period of time? the near-term climb is because the fed consensus is building up quite nicely. our position is they still have room to tighten. i think they tightened a couple of times this year. if they keep on this path and 2019, the environment becomes far more challenging. i don't think it is truly sustainable in the long run. jeffrey: let's break down the movement in interest rates between real and inflation. most of the movement of through this 3% move has been a move towards -- from real interest rate. that's above fed speak and debate over the neutral rate.
that leads you some room on the inflationary side. if there was any uptick in inflation that you could still press to higher rates, you have the neutral rate debate. it is about the economy. as the strength persists and if it persists, so will expectation about where the equilibrium rates can go. you can get higher rates. jonathan: the rate will move along with it in the future as the economy improves. the big question is risk appetite returning to the market is whether he get a simultaneous list in treasury yields and risk appetites. krishna: if you look at history, it is far from being incongruent. if the economy is doing reasonably well, inflationary pressures, contrary to what jeff was talking about, inflation is not really picking up. it has picked up some but it is not picking up north of 2%.
if that is the case and the profitability growth is relatively good, that's a good environment for risk assets. jonathan: interesting dynamics this week. yields pushed higher, but the dollar drove lower. i wonder what you think that dynamic at the moment. is that attention, but -- is that attention, or does it make sense to you? noelle: i would agree with krishna. we see inflation going into year-end softening around 1.9%. these drivers, the risk stories are coming off slightly. the trade war is not over. this is just the beginning. we are seeing that come off slightly. that is allowing fundamentals to take over and people remember the u.s. economy is actually growing fairly well. that is not going anywhere because fiscal policy is supportive in the consumer is confident. krishna: i think the driver of the dollar, the rate
differential is clearly a big driver, but equally important is the u.s. fiscal deficit and the ensuing u.s. trade deficit which are very related. effectively the fiscal deficit gets financed by the trade deficit. if you think of it that way, the strength of the dollar story because of rate differential starts to fade. this was our expectation and how things were playing out until april, then rate issues took over. now we are in the second leg up of that trade. the dollar face. from a long-term perspective, dollar strength when u.s. fiscal deficit is $1 trillion is difficult to put together. jonathan: this was the 2017 narrative. to fund the deficit you really -- to fund the deficit, you either need substantially higher treasury yields or a weaker dollar. are we back to that again? jeffrey: in 2017, it was
lagging. europe, asia, emerging markets were leading. this year it is about the reversal of that. growth solves a lot of problems. it is not just about the fiscal deficits, and i have the finest -- and i have to finance that with portfolio flows into treasuries, there is lot of means for the mantra holding the -- there are a lot of means for demands holding the dollar. u.s. growth is another factor weighing on the positive side towards the dollar, not just the interest rate. jonathan: it has field that they -- it has already fueled the divergence narrative this year. the big conversation is whether we get convergence. something important has taken place, and it is the bund versus treasury maturity. getting wider and wider. even though people are looking for convergence, those people keep getting burned. we broke out a new multi-decade white. where are you right now? noelle: we think it could continue to be a rather steady
-- at least in the near term, that going into year-end, european growth is looking relatively strong. the negative contributor we saw earlier this year after a very robust 2017 into european growth are no longer. we are talking the french strikes and harsh weather conditions. now we are in a sweet spot where we have an economy in the beginning stages of the recovery cycle and an ecb that is accommodative, and a consumer that is still spending. jeffrey: one of the interesting things about the bund-treasury spread, it is evident to do with -- it has everything to do with the boj. as you see the boj today, a little bit of movement on the steepening of the curve. it is still relatively happy -- it is still relatively early days and small. but the amounts coming out of japan going into europe because of the steepness of the curve is a big factor in that
treasury-bund spread. as the boj policy involves, as the economic fundamentals warrant, you may see some pressure on that spread come off. krishna: i think if european rates are a product of a bunch of things. part of it is european growth outlook. we have a slightly different take. we think european growth probably does not re-accelerate. if anything, it tapers off. the driver of that is the slowdown in emerging market growth. emerging market growth has been one of biggest drivers of revival of european growth. that story stabilizes our faith and i think you have an impact on european growth. i think the european fundamentals, far more than flows. let me make another point -- jeffrey: i agree with that completely. i'm saying is a factor in the
european fundamental biggest drivers. krishna: one point about 2017 and 2018 we talked about, the fiscal deficit in 2018 is getting far worse because of the tax. all the things we talked about in 2017 applied to 2018 and -- apply to 2018 in spades. we have to be cognizant of that in formulating our long-term view of the dollar. jonathan: krishna memani sticking with me alongside jeffrey rosenberg, and noelle corum will be sticking with us as well. coming up, the auction block. a strong investor appetite. this is "bloomberg real yield." ♪ jonathan: this is "bloomberg
i'm jonathan ferro. i want to head to the auction block. we start with treasuries. $40 billion this week at 2.02%. the highest rate since february 2018. -- february, 2008. all the auction bills at rates about 2%. netflix sold $8 billion for a partnership with starbucks. the world's largest food company offering senior bonds, the largest portion of the offering with its 30 year. the big headliner was rifinitive. the bio of thomson reuters financial and risk operation, the largest leveraged buyout of 2018, $18.8 billion offering a portion exceeding $10 billion. still with me, jeffrey rosenberg, krishna memani and noelle corum. noelle, leverage loans have exploded this year. the demand is absolutely massive.
where do you stand on the big debate? noelle: we continue to like leveraged loans. we don't think demand is going anywhere. a lot of those lows are coming from the institutional side. they tend to be rather sticky. as long as u.s. growth is healthy and we expect it to be for several quarters that will continue to support leverage loans. krishna: we agree. leverage loan market is being driven by a need for income in an environment where rates are rising. that gets you to the right point , in terms of demand and supply. the overall -- the cred quality of the corporate sector is stable. it is not superlative, but it is stable. and the fact that loans are senior at this point in the cycle where credit spreads are relatively tight.
i think that makes it a more attractive as well. jeffrey: we all agree from a short-term perspective rising rate environment, good economy, could economic outlook, great liquidity environment is a good environment for low default rates. the rising rate environment and loans really do better in that kind of environment. we have seen that performance in loans. one piece everyone knows about, and investors going into these know about it as well, but it is setting the asset class of for a -- the asset class up for a very different experience when the next cycle happens. where are you in the capital structure? what the seniority mean? the market is going through structural change. it's not your father's or great-grandfather's leverage loan market. subordination levels are nowhere near where they were a generation ago. you just have a very different product. it looks a lot more like bonds. that's ok, everybody understands what they are getting, but it means higher losses when you go to the next defaults cycle.
jonathan: one point is on quality. the second point is where you sit on the capital structure. connecticut where you sit on the -- i picked up on the point where you sit on the capital structure. the pushback for the huge demand right now is there are a lot of companies that are loan only. if you think you going to the capital structure, you are not because there is nothing beneath you. how often do you think about those things when you look at leverage loans? krishna: the level overall is lower than what it would be fully levered up in a regular company. you may not have anything subordinate, but in terms of other debt instruments to my you have equity that is subordinate to you. it is a subtle point. the point that jeff is making is a good one. let me respond to that. if you look at the historical data, there is no proof whatsoever that it leads to bad outcomes. let me be clear about that. the reason is it gives you the
flexibility to restructure a company out of bankruptcy you would not have otherwise. second, i think what that points to, and the issue jeff is raising, is the fact that it is not about levered loans all over. it is about levered loans from specific companies. it is a bottom-up exercise. if you are buying a levered loan for lower default, make sure they are going to have a lower default. picking up companies bottom-up is important. jonathan: i want you to weigh in the discussion on quality. people think they are going to quality. are they buying quality? noelle: real quick, the thing that changes this is growth. as long as growth is where it is where it is, and we don't think the 4% number that we saw in q2 his sustainable, we think we will print high 2's this year
and next year it will be solid . that will support fundamentals. quality obviously is important and that is definitely something you have to think about. we are not quite there yet. we don't think it will be a 2018 story. jonathan: is that what it comes -- is it a choice between junk, u.s. high-yield, and leverage? is that what it comes down to? noelle: if you think about high-yield, it is secretary -- it is stuck between these two driving forces. one is outflows year today, the other is supply hasn't been there in the way that it thought it had. high yields performed rather well. high-quality high-yield is yielding around 5.5%. that is attractive. leverage loans is around a similar 5%. we like opportunities in both, especially while growth is doing what it's doing.
just if i had to pick up would -- if i had to pick, i would probably go with levered loans. krishna: i think investing -- people's need for income is perennial. in that context, it is a question of how you're going to generate income. that is how we need to think about it. whether it is investment greater high-yield or loans is a choice you have to make. if high-yield spreads were materially wider, i think going on high-yield and make perfect sense. the upside is constrained. downside is significantly more than loans in our judgment and we get to leverage loans. jonathan: krishna memani sticking the with me along with noelle corum and jeffrey rosenberg. i want to go to market checks, where treasuries have into the week. a quiet selloff and yields up three basis points. the run-up in yields continues on 10's and 30's. 3.2 percent on the 30 year.
real yield." i'm jonathan ferro. it's time for the final spread. coming up over the next week, a busy week in new york city. world leaders in town for the united nations general assembly. plus, the fed decision. speeches from both mario draghi and koroda. another round of tariffs set to take effect between the u.s. and china. still with me for some final thoughts is jeffrey rosenberg, krishna memani and noelle corum. for the federal reserve, keep -- key points to look ahead to next week? noelle: we all know they are going to hike most likely. we are just watching for -- we
think that the surprise is going to be to the dovish side. december is already priced in at 70%. we don't think it will come out overly hawkish at this point. we are watching the trade monitoring. any talk around monitoring its impact on growth. we think they want to see it through into the harder data. it could be as early as q4. also, any talk around full employment, i think it will keep -- i think they are want to keep that subtle. they are discussing it. we think they may address it next week. jeffrey: there are four key points. the first thing, i think the most important part is do they change the language describing on monetary policy? if they were to, that would be a big point. second is economic forecast. the longer run forecast for the employment rate. there is a change that is important.
the third point will be how to characterize growth. i think we will get much of what we saw in his jackson hole speech. fourth, which probably moves the market, the dots plot. we have another year. i think we look at consolidation around 2018 and 2019. the longer run dot, the addition of the new members potentially brings down some of those figures. that could be a dovish outcome for the market. krishna: i think jeff is right. there is potential to look at the long-term dots and come to a dovish conclusion if you're inclined that way to begin with. if you think the fed is data dependent, there has not been any softness for them to give us any comfort on the dovish front. we think they will eventually do that and things will turn around the first half of 2019. for that we need to see a little data before it comes true.
jonathan: what do you make of the 2020 obsession? jeffrey: part of it is the fiscal mess. there is fiscal stimulus, and there is a strong demand side that if it rolls off. the debate is it could change to 20. that you are mathematically engineering the recession. on the supply-siders that say there is productivity in the pipeline. there is animal spirits. there's 3% and it is sustainable. that is where you are getting the 2020 thing. jonathan: beginning with the first question, you are part of the 2020 recession? jeffrey: no. krishna: no. as we talked about last time, five more years. noelle: no. jonathan: is it too early to go along em risk? jeffrey: no. there are some pockets and
opportunities. you have to be selective. krishna: you should be long em risk today. noelle: too early but we do like countries that are exposed to u.s. growth. jonathan: so many people come on this program and say the path of least resistance for treasury yields is lower, and yields have gone higher. is the path lower or higher? jeffrey: higher. krishna: short-term higher. long-term, lower. noelle: i'm with krishna. short-term, higher. long-term, lower. jonathan: fantastic stuff. jeffrey rosenberg, krishna memani and noelle corum, thank you for joining us. from new york, that does it for us. we will see you next at 1:00 friday p.m. new york time. this is bloomberg. ♪
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